July 1, 2020

New Challenges to the Liberal World Order: Reassessing Controversies Surrounding the Energy Charter Treaty

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Bike Strike of Fridays for Future in conjunction with many squares throughout Italy.
Bike Strike of Fridays for Future in conjunction with many squares throughout Italy.

Introduction

On 11 December 2019, the European Commission adopted the European Green Deal1 with the objective to achieve climate neutrality in Europe by 2050. The new policy paradigm consists in shifting away from fossil fuels towards a new, carbon-free economy and entails an ambitious transformation of economic practices. Although the recently adopted policy mostly addresses internal EU policies, its agenda will probably affect international security relations since it engenders new challenges and opportunities around the world. The policy paradigm opened by the European Commission may even produce additional challenges for international law and for the multilateral architecture created in the aftermath of the Cold War. In this context, the most far-reaching multilateral regime for energy—the Energy Charter Treaty (ECT) adopted in 1994 and in force since 1998—has gained renewed attention in expert circles. On the one hand, some argue that the ECT needs to be adapted to the new context of a climate emergency. On the other, it is argued that the principle of the independence of law from politics remains one of the fundamental principles of the market economy. It might be worth recalling that the reference to liberal economic values was reiterated by Kadri Simson, the recently appointed EU Commissioner for Energy, during her confirmation hearings at the European Parliament in October 2019. By stating this, Ms Simson emphasised that the implementation of the European Green Deal (EGD) must absolutely be in line with the liberal values of European integration.

To address this timely issue, the present analysis will attempt to make clear the implicit contradiction between the principle of the independence of the law and the principle of mobilising it for a purpose. In order to do so, the article will first define the semiosphere of liberal environmentalism that has emerged since the 1990s and is questioned by a large part of the policy community associated with environmental movements. The article will then provide a brief analysis of the Energy Charter’s role in protecting investments in renewable energy compatible with the EGD. Finally, the article will highlight difficulties and challenges stemming from possible renegotiation of the treaty as well as the risks associated with a hypothetical EU withdrawal from it.

Emerging Alternatives to Liberal Environmentalism

Almost two decades ago, a thought-provoking book by Steven Bernstein2 raised a point about the existence of a set of norms, discourses and world-views about global environmental protection. In his view, the semantics inherent to climate action stem from a reconciliation between environmental protection norms and market economy narratives. For instance, the use of concepts of “sustainable development” and “energy transition” corresponds to this specific context of economic policies and strategies.

Without questioning the pertinence of Bernstein’s definition of liberal environmentalism, it may be noted that the reconciliation between environment and economic development is now being challenged by some political forces and social activists. The reference to the climate emergency risks affecting the normative foundations of liberal environmentalism and it could be argued that a new set of beliefs is emerging with new perceptions of the climate action emergency, while policy discourses increasingly integrate more ambitious terms of climate justice and decarbonisation. The newly emerging context is shaped by widespread attention on ever-spreading movements for climate action, including Fridays for Future and Rebellion Extinction, turning a spotlight on the popularisation of the topic of climate change beyond specialised expert communities. In recent years, the debate on mitigating climate change has been spreading among policy analysts, scientists, mass-media outlets and business communities.

A socio-economic identity might evolve and replace liberal environmentalism with a new policy paradigm, even though the new model still remains unpredictable and undefined at this stage. However, actors in the debate on climate change mitigation and related issues represent a polyvalent structure comprising adherents to the existing liberal environmentalism and supporters of a stronger environmental dimension within the already existing set of norms. Wide discrepancies of perception also emerge across political lines and according to cognitive differences about the perception of the climate emergency. In this context, new discourses emerge emphasising an alternative path from liberal environmentalism.

Rule of Law versus Law for a Purpose

This transformation —at least at a certain level—of climate action discourses towards endorsement of anti-business protests and reference to globally driven ambition creates paradoxical similarities with discourses and world-views which existed under the Soviet regime. The latter represents an attempt at an economy of hope, since the command economy was seen as an alternative to capitalist society by rejecting an ever-evolving quest for profits. To achieve a new form of society, the Soviet system of law was based on a set of norms serving the political narrative. For example, the Constitution of the Soviet Union institutionalised various principles of freedom, such as freedom of assembly, of speech and of political action, as long as those freedoms corresponded to the main purpose—the construction of communism.

Paradoxically, at least some representatives of the environmental movements adopt the logic of law submitted to a purpose—which is now economic decarbonisation. Although the relevance of the energy transition is subject to a consensus, it remains important to highlight possible deviations from principles inherent to a liberal economy. A political viewpoint focusing on aligning law for a political purpose emerged particularly in respect of discussions about amendments to the Energy Charter Treaty.

An illustrative example was provided by an impressive panel discussion at Press Club Brussels Europe, when panellists asked that the Energy Charter be made more compatible with the newly declared decarbonisation targets.3 The main criticism of the treaty, signed more than 15 years ago, is about its provisions protecting investments in, among other things, fossil fuels. Participants in the panel discussion argued that the procedure of international investment arbitration was undemocratic per se.4

What is more, a dedicated website called “Energy Charter Treaty’s Dirty Secrets”5 appeared to criticise the multilateral energy regime for bias in favour of fossil fuel industries. The website published an open letter signed by various environmental activists appealing for either reform or repeal of the long-standing practice of non-judicial investor–state arbitration. The letter states, inter alia:

Investor-state arbitration under the ECT is at odds with the rule of law and undermines domestic legal systems. Contrary to the principle of equal access to justice, the ECT creates a parallel justice system that is exclusively available to some of the richest and most powerful actors in society: foreign investors.

The negative reference to “foreign investors” is particularly striking. For instance, an investment can be state-driven and domestic but still be harmful in terms of climate change. By contrast, a foreign investment may also consist in carbon-neutral technologies. Hence, a negative connotation of the term “foreign investors” contains an implicit statement against globalisation. Paradoxically, such an anti-globalist stance does not come from right-wing populists, although some similarities with the “alt” agenda may be noticed.

The letter’s argument ignores the fact that non-judicial arbitration has long been a favoured mechanism to ensure investors’ independence from possible pro-state bias in the courts. In turn, the terms used in the letter imply a juxtaposition between domestic and foreign investments—a principle usually referred to by economic nationalists and supporters of protectionism. Thus, the terms used in the letter tend to break from the liberal world order, where property rights coupled with the principle of non-discrimination prevail above all else. To remind, the principles of investors’ independence and of property rights have been at the forefront of liberal democracies since the French Revolution of 1789.

The debates briefly described above reveal an implicit willingness to exempt the EU and its member states from an obligation to ensure international investment protection within the Energy Charter regime—which also implies losing European investment protection overseas. While providing arguments against the ECT’s investment protection regime among other issues, Nathalie Bernasconi-Osterwalder of the International Institute for Sustainable Development suggested at the Press Club Brussels Europe that parties agree to either reduce the timeframe of, or even annul, the so-called “sunset” (or “survival”) clause allowing investors to sue the treaty’s signatories in the event of a breach of investment protection. In fact, the ECT ensures that any investor in the treaty’s geographical extent has the right to protect its invested assets even up to 20 years after a state withdraws from the treaty. Bernasconi-Osterwalder’s proposal would actually deprive investors of such a possibility. However, compensation for companies—even in the event they lose assets in coal and hydrocarbons—can be used by the industry either for social programmes (e.g. for exiting the coal industry) or energy innovation. Instead, the introduction of an explicit distinction—which could become grounds for discrimination—between investments in fossil fuels and in carbon-free energy could undermine the principle of property rights.

A closer look at the legal text itself, existing investment arbitration practice and extensive specialised literature would probably be needed to avoid a reductionist view of the role of investment protection in the energy sector. Meanwhile, let us now hypothesise some possibilities for amending the treaty and envisage the consequences stemming from a possible EU withdrawal from it.

Controversy: Returning to the Legal Discussion

The ongoing debates, including opinions published by the leading news portal on EU affairs, EURACTIV,6 may generate belief in a contradiction between the pro-fossil-fuels Energy Charter and the struggling supporters of renewable energies. However, this interpretation may be based on a general misunderstanding of the Energy Charter’s scope, since the advantages to investors in renewable energy ensured by the ECT’s provisions (e.g. Article 10 on investment protection principles and Article 26 on investor–state dispute settlement mechanisms) may be underestimated by the treaty’s critics.

The widely criticised ad hoc arbitration is certainly not an outdated mechanism for the protection of investments in renewable energy and it exists beyond the Energy Charter itself.7 It can be easily claimed that a large part of the expert community specialised in energy law would agree that the ECT contains useful provisions on a broad definition of investments (which include, inter alia, any investment in carbon-neutral energy), ensuring protection for existing investments and for investor–state arbitration.8 Moreover, when the ECT appeared, it was the first international legal instrument to relate energy governance with environmental protection. As a result, the Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) adopted alongside the ECT defined energy efficiency as an energy source.

Since 2010, work to update the Energy Charter process has been taking place to address various geopolitical and legal challenges that have affected the treaty.9 Meanwhile, a need to maintain and improve multilateral energy governance has been voiced by various policy experts. Among others, the significance of the Energy Charter was highlighted by a paper co-authored by a former European Commissioner for Energy, Andris Piebalgs, and issued by the Florence School of Regulation, a leading European energy think-tank. The paper provides an overview of the ECT’s provisions and states, inter alia, that

[s]tate sovereignty and sovereign rights over energy resources are explicitly recognised. The objective is to create a level playing field with the same rules applying to governments and market players, and in doing so to depoliticise the energy sector.10

The paper notes that the overarching approach of the Energy Charter corresponds to the liberal order and environmental protection, thus referring indirectly to the principle of liberal environmentalism.

In terms of arbitration practice, the ECT provides investment protection to any energy products and materials without making a distinction between fossil fuels and carbon-free energy.11 In terms of existing investment arbitration practices, the ECT’s provisions have provided numerous advantages to investors in renewable energy to defend their rights against states—hence the significant number of lawsuits. The main area of concern for investors in renewable energy is continued support for power grids by public authorities. It is widely known that solar and wind energy is intermittent because of weather fluctuations and they therefore create pressure on electricity grids. In order to promote renewables, states establish subsidies for access to the grid (the so-called feed-in tariffs), which constitute a necessary market mechanism ensuring priority access to the grid and a fixed tariff to do so. The positive results of the feed-in tariffs are undisputable: these subsidies incentivised investors to develop solar panels and wind farms across Europe with assured grid connection and fixed costs. When some countries (e.g. Italy, Poland and Spain) decided to remove the feed-in tariffs, the profitability of small-scale renewable energy projects was hindered, making conditions for investment difficult. In this context, the ECT is so far the only multilateral mechanism that can be used by investors operating in other countries to defend their rights against unexpected and unjustified attempts to reduce national support for renewables. Ultimately, lowering the common denominator of investment protection may only hinder protection mechanisms for carbon-free energy.

Past Experience to Take into Account: Renegotiating is Difficult

Although changing the scope of investment protection may seem hard to justify in terms of protecting carbon-free energy, there were calls to amend the ECT during the latest meetings of the Energy Charter Conference, the institution’s intergovernmental decision-making body. Any amendment to the treaty requires a consensus of the existing Energy Charter membership of about 50 countries, which means it is particularly difficult to make significant changes to the provisions. A Supplementary Investment Treaty was discussed in the early 1990s to fine-tune the existing provisions, but the initiative was aborted in 1998, mostly due to deep disagreements among the membership.12

Some two decades later, the EU and the US attempted to find a compromise for an ambitious Transatlantic Trade and Investment Partnership (TTIP). During the negotiations, some observers noted that the TTIP would diminish the role of the ECT, particularly in light of the transatlantic trade in liquefied natural gas (LNG).13 Nevertheless—and despite the fact that the US might have been the most like-minded country in terms of a pro-market approach—the TTIP negotiations failed, with the subject of investment protection mechanisms among the main impediments to agreement. It might therefore sound paradoxical that, despite various challenges, the ECT text adopted in 1994 remains, so far, the only successful multilateral mechanism providing an arbitration platform for private investors in the event of a breach of investment protection by a state. The ECT-based Supplementary Treaty and the TTIP both failed to provide the consensus necessary to engender a powerful investment protection mechanism.

Renegotiating the ECT’s investment provisions risks alienating those countries that might be reluctant to remove fossil fuels from the sectors protected. For instance, some signatories including Japan and Norway seem reluctant to amend the treaty in this direction. Any renegotiation of investment protection provisions would create further divisions between Western governments on the matter.

Some would argue that investment in fossil fuels has a detrimental effect on the climate and that these investments therefore should not be protected. However, this argument also seems rather reductionist, even in terms of efforts to protect the climate. In particular, if international investment in Central Asia, the Caucasus and Turkey (non-EU members of the Energy Charter Conference) included solutions to modernise energy systems in order to reduce energy losses and promote energy-efficient supply schemes, coal-to-gas conversion and more efficient upstream development by reducing flaring of gas condensate, this would contribute to a relatively fast reduction in greenhouse gases.

Withdrawal: Irrational in Terms of Liberal Values

If the ECT is to be subject to carbon neutrality targets, an alternative solution to amending the treaty would be for the EU to withdraw from the Energy Charter.14 But appealing for the EU’s withdrawal from the only multilateral energy treaty could push the EU to become similar to non-liberal policymakers who persistently undermine multilateralism. However, a number of policy questions emerge beyond the debate over the legal extent of the multilateral energy treaty. For instance, should prominent policymakers within the EU adapt a discourse about the Energy Charter that would indirectly coincide with Donald Trump’s views on the World Trade Organization? In fact, the US president’s positions against the WTO are about an international system he deems unfair and allegedly detrimental to US interests.15 How would Europe’s approach differ from that, if the ECT is challenged because a large number of cases (mostly related to renewable energy protection) are directed against EU member states or the Union itself, as argued by the current opponents to the treaty?

Or should the EU follow the Kremlin’s example in withdrawing from the ECT because the treaty served as a framework for an unfavourable decision in an investment case in 2014? Russia decided to withdraw from the treaty in the aftermath of the Yukos case,16 provoked by creeping nationalisation allegedly orchestrated by the Russian national oil company, Rosneft. In this context, one should not underestimate the significance of the Yukos case for the Russian domestic political debate driven by its former owner, Mikhail Khodorkovsky. Hence, by adopting a similar approach by withdrawing from the ECT, the EU risks indirectly endorsing the action against Yukos despite all the symbolic pro-democracy significance of the case. In this respect, one might wonder if the EU should compromise its liberal values for the sake of the policy aims and therefore engender similarities with the Soviet Union’s view of international law.

In any event, withdrawal from the treaty would raise more questions than it answers and would entail a further geopolitical shift from multilateral regimes towards a world order based on unilateralism and protectionism. Even without a crystal ball, it can be assumed that a unilateralist approach would openly contradict the EU’s international soft power, which is mostly based on the defence of multilateral values.

Conclusion

The European Green Deal opens a genuinely new paradigm related to the policy ambition of climate neutrality. At the same time, calling liberal environmentalism into question creates difficulties in balancing between a requirement for economic mobilisation and a need to protect the existing liberal system of values. Liberal environmentalism now coexists with new approaches and discourses that seem to have less faith in the market-based legal and political system. While any legal regime needs to be adapted to new realities, the process of updating the ECT must consider the urgency of climate action as an important challenge leading to reinforcement of the treaty’s protection of investment in clean and renewable energy. Moreover, the updating could potentially involve the implementation of voluntary energy-efficiency objectives by the ECT member countries.

However, the emergence of new approaches to law, including attempts at a policy-oriented legal order, generate additional challenges to energy multilateralism. A hypothetical lowering of the common denominator for investment protection or EU withdrawal from the treaty would put investments in renewable energy in Europe at risk. In addition, liberal values defended by the EU would be compromised, especially if the ECT were rejected for reasons based on misunderstandings of the treaty text and of subsequent arbitral awards. By choosing the risky path of rejecting the Energy Charter, the EU would strengthen existing vocal opponents of multilateralism, allowing their paradigm to prevail on the international stage.

Moreover, introducing a distinction between investment protection in fossil fuels and those in renewable energy could open the Pandora’s box of a discriminatory approach to the principle of property rights. In this context, aligning the law to a purpose would further create historical reminiscences of the Soviet approach to law, leading to damaging effects on efforts to mitigate climate change. If reducing climate change takes on an anti-business dimension, it will certainly weaken the economic efficiency of the energy transition because industries will lose value and will reduce their ability to conduct social programmes and innovation.

Since the new European Commissioner for Energy is firmly committed to achieving a balance between the European Green Deal and liberal values, Ms Simson might need to take a long-term perspective of multilateralism and assess the wider political risks inherent in a unilateral withdrawal from the ECT. A reconciliation of interests between environmental movements and non-liberal states should probably be avoided, despite the mounting criticism of the Energy Charter.

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1 Ursula Von der Leyen, “A Union that strives for more: My agenda for Europe”, Political Guidelines for the Next European Commission 2019–2024. Brussels: European Commission, July 2019. ec.europa.eu/commission/sites/beta-political/files…

2 Steven Bernstein, The Compromise of Liberal Environmentalism (New York: Columbia University Press, 2001).

3 Frédéric Simon, “Luxembourg leads EU push to climate-proof Energy Charter Treaty”, EURACTIV, 4 September 2019. www.euractiv.com/section/energy/news/luxembourg-le… (last accessed on 3 October 2019).

4 Part of the discussion at the Press Club Brussels Europe on 4 September 2019 can be viewed at: www.youtube.com/watch?v=Iq0MdyK2CdY

5 www.energy-charter-dirty-secrets.org/.

6 See, for example, Yamina Saheb, “Europe’s Green Deal is under threat from Energy Charter Treaty”, EURACTIV, 20 September 2019. www.euractiv.com/section/climate-environment/opini…

7 Ad hoc investment arbitration is broader than the ECT, while the treaty itself provides a major multilateral framework for ad hoc arbitration. For an explanation, see: Christopher F. Dugan, Don Wallace Jr., Noah D. Rubins & Borzu Sabahi, Investor-State Arbitration (Oxford: Oxford University Press, 2011); Veronica Lavista, “Oil Prices in Investment Arbitration, Partial Assimilation” in Andrei V. Belyi (ed.), Beyond Market Assumptions: Oil Price as a Global Institution (Berlin: Springer Nature, 2020), pp. 103–5.

8 See, among others: Thomas W. Wälde (ed.), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (London, The Hague & Boston, MA: Kluwer Law, 1996); Graham Coop (ed.), Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty (Juris Publishing, 2011).

9 Irina Kustova, “A treaty à la carte? Some reflections on the modernization of the Energy Charter Process”, Journal of World Energy Law and Business 9 (5) (October 2016), pp. 357–69.

10 Ernesto Bonafé & Andris Piebalgs, “The New International Energy Charter: Sustainable Energy Transition, Investment Dispute Resolution and Market Regulation”, Florence School of Regulation Policy Brief 2017/33 (Florence: EUI, December 2017). fsr.eui.eu/wp-content/uploads/QM-AX-17-033-EN-N.pd…

11 Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (New York: JurisNet, 2008).

12 See Craig Blamberger & Thomas Waelde, “The Energy Charter Treaty” in Martha M. Roggenkamp et al. (eds), Energy Law in Europe: National, EU and International Regulation, 2nd edn. (Oxford: Oxford University Press, 2007).

13 Andrei V. Belyi, Transnational Gas Markets and Euro-Russian Energy Relations (London: Palgrave Macmillan, 2015).

14 Some experts point to the need to stop the proliferation of fossil fuels as a potential alternative to the ECT. See, for example, Yamina Saheb, “It’s time to scrap the Energy Charter Treaty”, OpenExp, 8 November 2019. www.openexp.eu/posts/its-time-scrap-energy-charter…. See also www.fossilfueltreaty.org/.

15 Chad P. Bown and Douglas A. Irwin, “What Might a Trump Withdrawal from the World Trade Organization Mean for US Tariffs?”, Policy Brief 18-23, Peterson Institute for Economic Affairs, November 2018. www.piie.com/publications/policy-briefs/what-might…

16 Martin Dietrich Brauch, “Yukos v. Russia: Issues and legal reasoning behind US$50 billion awards”, Investment Treaty News, International Institute for Sustainable Development, September 2014. www.iisd.org/itn/wp-content/uploads/2014/09/iisd_i…

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